Theranos' Future Looks Bloody Grim as Feds Threaten a Shutdown

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Theranos' Future Looks Bloody Grim as Feds Threaten a Shutdown

A laboratory scientist performs an experiment in a Theranos R&D lab in Palo Alto in 2014.

Drew Kelly

Biotech startup Theranos is in trouble again. This time, federal regulators are threatening to shut down the company's California lab and ban its owners from running another blood testing company for two years.

For a company built on the promise of painless blood tests, that's gotta sting. Now, the government hasn't shuttered Theranos quite yet. The warning, a letter from Centers for Medicare and Medicaid Services procured by the Wall Street Journal, is dated March 18. Theranos has responded to the feds about the infractions listed in the letter (which include issues with flawed test results), and CMS is currently reviewing their response.

This is bad, bad news for a company whose brand is already facing serious problems. Since October 2015, when the Journal exposed troubling flaws in Theranos' signature fingerprick technology, the company has lost credibility with the press, the diagnostic community, and consumers. Perhaps most importantly, it has threatened important business partnerships with companies like Walgreens1. The question now is, can Theranos survive?

That depends, first of all, on whether CMS follows through to revoke Theranos' California license and ban its owners from running other labs (which would include a busy Arizona lab). "If the regulators revoke some approval they had given, the company is going to go into emergency mode," says Joshua Rauh, professor at Stanford Graduate School of Business. At that point, turning a profit on blood tests is probably out of the question, so Theranos' owners and board of directors would probably try to sell off parts of the company's salvagable research and (precious, precious) intellectual property. "The technology might not be profitable right now, but it could be quite valuable to the right buyer," says Rauh.

But maybe Theranos pulls a hail Mary, and CMS doesn't revoke the company's license. At that point, survival becomes a question of how much cash the company has in its coffers. Theranos would need to overcome problems on two fronts: "One, they have to demonstrate that they have technology that works," says Rauh. Which will take a lot of work. Theranos built its brand declaring it would be able to complete up to 70 tests from a single drop of blood, for a fraction of its competitor's costs. Despite the Journal's reporting (corroborated by warning letters from the feds) on all Theranos' problems, nobody outside the company (and possibly even within it) knows how far they are from blood drop testing.

Which leads directly to their second challenge: Everyone is aware about the doubts surrounding the company's tech. "Even with scientific evidence, the brand of the Theranos name is in trouble," says Rauh. Tainted brands are very hard to revive, even for mature companies have long-standing positive relationships with customers. Theranos has never really had a relationship with its customers, besides promising something that never really came true.

No matter what, Theranos is in trouble. Which could force founder Elizabeth Holmes to loosen her grip on its operations. Rauh explains that most startups sign contracts that give their venture capitalist investors room to usurp control. "If certain growth benchmarks don't get met, the VCs take additional seats on the board and steer the company in different directions that they think will be more profitable more quickly," says Rauh. Or, sell the company. Fact is, a lot of VCs are impatient, and will start getting antsy about a return on their investment. And that's for companies that aren't being threatened by the feds.

And the VCs could also hit Holmes and her board with lawsuits if they determine they've been conned out of their money. "The rules that apply to Theranos are exactly the same as those that apply to any other company that raises money from investors," says Joseph Grundfest, professor at Stanford Law School. But that would be tricky, because it is unlikely that Holmes intentionally set out to bilk anybody. "We would have to know exactly what Theranos said to people, what people understood about what Theranos said, what risk disclosures were discussed," says Grundfest.

Of course, nobody on the outside knows what kind of contracts Holmes signed with Theranos' investors; without that information, speculation is useless. But few would predict that Theranos' immediate future holds anything besides more trouble.

1 UPDATE: 4/13/16 8:15pm ET This story has been updated to note that Walgreens has only closed one Theranos testing station, at a Palo Alto drug store. Walgreens still hosts over 40 Theranos testing centers in Arizona. However, Walgreens does not plan to open any additional testing centers until questions about Theranos' technology have been resolved.